Economics: Business Cycles, GDP, and Key Theories

Business Cycle

The natural rise and fall of economic growth that occurs over time, with four stages: expansion, peak, contraction, and trough.

Four Stages of the Business Cycle

Expansion, peak, contraction, and trough.

Gross Domestic Product (GDP)

The monetary value of all finished goods and services produced within a country's borders in a specific time period.

GDP Measurement

A nation's overall economic health and activity.

GDP Calculation

GDP = C + I + G + NX (Consumption + Investment + Government Spending + Net Exports).

Social Security Payments in GDP

No, they are transfer payments and not payments for goods or services.

Negative GDP Growth for Two Quarters

The economy is in a recession.

GDP Indicator Type

A lagging indicator, since it reflects past economic performance.

Production Possibilities Frontier (PPF)

The most efficient combinations of two goods an economy can produce using its resources and technology.

Point on the PPF

Efficient production.

Point Inside the PPF

Inefficient but attainable production.

Point Outside the PPF

Unattainable production with current resources.

PPF Shift Causes

Technological advancement or increased resources.

Four Factors of Production

Land, labor, capital, and entrepreneurship.

Scarcity

The state of unlimited desires and limited resources — the central problem of economics.

Dismal Science

Because of the inevitability of scarcity and Malthus's gloomy predictions about overpopulation.

Malthusian Trap

A situation where population growth outpaces resource growth, leading to scarcity and poverty.

Escape from Malthusian Trap

Technological innovation.

Normative Analysis

Economic analysis based on opinions or values — what should be done.

Ceteris Paribus

All other things being equal.

Consumer Sovereignty

The idea that consumers determine what goods are produced by choosing what to buy.

Supply Curve

A graphical representation of a supply schedule.

Price Ceiling

A maximum price set below the market equilibrium (e.g., rent control).

Price Floor

A minimum price set above the market equilibrium (e.g., minimum wage).

Pareto Optimality (80/20 Rule)

The principle that roughly 80% of outcomes result from 20% of causes.

Negative Externality

A cost imposed on others, like pollution.

Public Goods

Goods that are nonexcludable and nonrivalrous, meaning people cannot be prevented from using them, and one person's use doesn't reduce availability for others.

Examples of Public Goods

National defense, public parks, and street lighting.

Supply and Demand Curves Creator

Alfred Marshall.

Alfred Marshall's Contribution

Inventing supply and demand curves and defining economics as 'the study of humanity in the ordinary business of life.'

Comparative Advantage and Labor Theory of Value Introducer

David Ricardo.

Absolute Advantage

The ability to produce more of a good or service than another producer.

comparative advantage

The ability to produce a good or service at a lower opportunity cost than another producer.

comparative advantage explanation

Why nations specialize in certain goods even if they can produce most goods efficiently.

The Wealth of Nations

A book written by Adam Smith.

invisible hand

The concept that self-interest guides the economy, as proposed by Adam Smith.

market mechanism

The interaction of supply and demand, quantified by Alfred Marshall from Adam Smith's idea.

The Theory of Moral Sentiments

Adam Smith's lesser-known major work.

Father of Communism

Karl Marx.

Das Kapital

A book written by Karl Marx.

The Communist Manifesto

A book co-authored by Karl Marx and Friedrich Engels.

Workers of the world, unite.

A famous quote by Karl Marx.

capitalism

An economic system based on private ownership of the factors of production and free markets.

command economy

An economy where the government owns and controls the means of production.

Federal Reserve (the Fed)

The central bank of the United States that manages monetary policy.

main goals of the Fed

Price stability, moderate long-term interest rates, and maximum employment.

current Chairman of the Federal Reserve

Jerome Powell.

price stability

A steady rate of inflation that allows businesses and consumers to plan for the future.

structural unemployment

The worst form of unemployment, caused by a mismatch between workers' skills and job requirements.

discouraged workers

People who have stopped looking for work and are not counted in the official unemployment rate.

hyperinflation

Extremely high inflation — more than 50% per month.

G-7

The Group of Seven major advanced economies (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States).

Economics is the study of humanity in the ordinary business of life

A quote by Alfred Marshall.

main cause of the Great Depression according to Keynes

Insufficient demand.